Economics Blog

An economy with spring in its step?

U.S. growth in the first three months of the year is widely believed to have stalled or even contracted. A fresh reading on that is due this week and the news is expected to underwhelm.
Fortunately, the current quarter has generated a bit more economic buzz. The week could provide more evidence of whether the economy is indeed blooming again with the spring, or whether it needs the Federal Reserve to keep applying the fertilizer.

This week's announcements

Here's what's on tap:

The Commerce Department reports on orders for durable goods for April, Tuesday at 8:30 a.m. (All times Eastern.)

The Case-Shiller home price report for March, Tuesday at 9 a.m.

The Conference Board reports on May consumer confidence, Tuesday at 10 a.m.

The Commerce Department releases a revision of first-quarter GDP, Thursday at 8:30 a.m.

The Commerce Department reports on April personal income and spending, Friday at 8:30 a.m.

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Politics, the dollar and you

As a campaign year and foreign crises heat up, the dollar keeps going down. Hear what it all means for your finances.

Mark Hamrick

Washington Bureau Chief, Bankrate.com

Greg Valliere

Chief Political Strategist, Potomac Research Group

John Canally

Economist, LPL Financial

Laura Dunn

Editor, Bankrate.com

Transcript

(OPEN)

Mark Hamrick: From Bankrate.com, This is "Your Money This Week."

I'm Mark Hamrick in Washington.

Some "All-American" themes in the spotlight this time.

What could be more American than the U.S. dollar and our democracy, warts and all?

We're going to dive into the intersection of politics and your money with Greg Valliere, chief political strategist for Potomac Research Group. How might Washington affect your pocketbook this year? Or not? The answers might surprise you.

And economist John Canally has some fascinating insight into the decades-long decline in the value of the dollar. Is there more downside ahead, and why does it matter?

All of that and more coming up on "Your Money This Week."(music transition)

First up: In the wake of the financial crisis a few years back, Washington has had an increasing role in the financial lives of Americans, like it or not.

In the midst of a mid-term election year, and with tensions rising between the U-S and Russia, and the U-S and China, we thought it would be a good time to chat with Potomac Research Group's Greg Valliere.

To begin, I asked Greg whether there's much chance that Congress and the President can agree on something, as the political temperature rises this year.

Greg Valliere: There maybe are a couple of bills that will get addressed between now and the election. One that really stands out is that the highway trust fund runs out of money by probably mid-August. That's not a great time to run out of money because that's when you fix highways. So I do think there'll have to be a bill before the August recess that replenishes the funding for the highway trust fund.

Mark Hamrick: And then in terms of politics Greg, it is looking increasingly like Republicans could end up controlling both the House and Senate, correct?

Greg Valliere: Yeah, you got to say the easiest call in the last few years is the House. The House almost certainly will stay Republican. In fact, it's starting to look as if they might actually gain a few more seats.

The Senate is the big story. The magic number is six. I can find only two Republican seats that might be vulnerable, and there are at least 10 seats held by Democrats that look pretty shaky.

Mark Hamrick: How would that make the final two years of the Obama administration go, to the extent that the President is obviously looking to define his legacy and faces the prospect of, at perhaps best for him, a divided Congress and worst one that's dominated by the GOP?

Greg Valliere: It could be a very contentious and unproductive two years. Of course, we've seen a lot of that over the last few years. I think the president would probably have to veto some initiatives. I think his veto would be sustained on just about everything. He could still probably do some things through regulatory policy with a tough SEC, with tough regulations against coal, things like that. But in terms of any legislative initiatives, I think the president would be on the defensive.

Mark Hamrick: Greg, one issue that has financial and employment repercussions is, of course, immigration, and House Speaker Boehner famously mocked his fellow Republicans recently who, he was making the point they were unable to find the will to vote for a bill. Is that unlikely also to be approved before November?

Greg Valliere: Unlikely, Mark, but not impossible. I happen to think that Boehner is now pondering his legacy. He bought a condo south of Naples in Florida, and most people feel he probably will not serve out the last two years if he's going to get re-elected in Cincinnati. But if he is thinking of leaving fairly soon, I think he would like to try to get something on immigration. And I think the president would like to, as well. The problem is this is such a juicy issue to demagogue ahead of an election, either this fall's elections or 2016. So you got to think the odds are below 50 percent that we could get something.

Mark Hamrick: Greg, over recent days and weeks relations with Russia and China have seemed to be increasingly difficult. The U.S. filing charges against members of the Chinese military for alleged cyber spying, of course; economic sanctions have been our response to the crisis in the Ukraine; US/Russia relations, the worst since the Cold War. Do you think these have major implications for, let's say, investors and consumers?

Greg Valliere: For now I'd say no. I'll take a contrary end view, Mark. I think that it's unlikely that Putin would be brazen enough to invade eastern Ukraine, because I think he knows what would happen to the Russian stock market, to the Russian ruble. It would be disastrous, and of course, his economy is in pretty weak shape to begin with. As far as the Chinese issue, it's been well known that they have hacked into our companies, and I think we've hacked into some of their companies. The really crucial issue for the markets is whether China, in a fit of anger, might lighten up or stop buying U.S. Treasurys. I think that's extremely unlikely because they hold so many already. If they did that, they would hurt their own portfolio.

Mark Hamrick: Yeah, we're all interconnected today for better and for worse. It's a little like a marriage that can't be unwound, right?

Greg Valliere: Yeah, I mean, we'll have arguments. Maybe one partner will have to sleep on the sofa. But when it comes to the U.S. and China, I do not see a divorce. I don't see a big rupture in relations between the two countries.

Mark Hamrick: Greg, as you look out across the landscape, politically speaking, you know, we're always looking for the so-called "black swan," the event that could surprise us. Do you think that we're going to continue in this period of relative quiet? And obviously you can't predict the unpredictable, but as you look to advise the people who essentially pay you for their consulting services and so forth, what do you think the chief dynamic is going forward? Is it that things should be relatively low-key?

Greg Valliere: I would say not only low-key, Mark, but I think the big themes in Washington are remarkably positive for investors. You've got a Federal Reserve that's extremely dovish and is going to stay that way -- Janet Yellen being a bit more dovish than Ben Bernanke. You've got the budget deficit falling sharply, and fiscal restraint fully in place. You have virtually no chance of a big debilitating crisis this year, like we saw last year. There's not a fight over the debt ceiling until next March. And you have an election outcome that for many in the markets -- not all, but for many in the markets -- would be a welcome election. So I think the big themes in this town for investors are pretty good.

Mark Hamrick: Well, investors do seem to like it when Washington can do no harm, and there seems to be a fair degree of that, at least for the moment. Greg Valliere, its always terrific to catch up with you. Thanks so much.

Greg Valliere: Great to talk to you.

Greg Valliere, chief political strategist for Potomac Research Group. He spoke with us in Washington.

For ongoing coverage of all the issues affecting your wallet, be sure to check out Bankrate.com, and our mobile apps.

(TRANSITION MUSIC)

The "almightly dollar" isn't what it used to be.

And that's a point being made by our next guest, John Canally, chief economist for LPL Financial.

Relative to other currencies around the world, the dollar has slipped for many years now. How much is the Federal Reserve to blame, and what does it mean for consumers and the economy?

Here's our chat with John Canally.

John Canally: The dollar went off the gold standard in the early 1970s. And since then it's declined roughly a percent per year. So, a declining dollar is really nothing new. What's sped up the decline has been the Fed's foray into quantitative easing, where they're essentially printing up money out of the blue and taking that and purchasing bonds and mortgage-backed bond, mortgage-back securities, in the open market. That has sort of increased the pace of the decline in the dollar. So before QE, the dollar fell at about 7/10ths of a percent a year, maybe 8/10ths of a percent a year. Since QE, it's quickened a bit, and it's now falling at about one and a-half percent a year. But with the Fed getting ready to end quantitative easing by the end of this year, we may very well revert back to that sort of 7/10th to 8/10ths of a percent per year drop in the dollar.

Mark Hamrick: And John, a weaker dollar, of course, makes U.S. goods and services more competitive abroad. And I'd like for you to talk about that if you will, understanding that the counter, of course, is that buying things from beyond U.S. borders also becomes more expensive for Americans.

John Canally: That's right. So that's where the dollar can bite here. If a dollar is weak enough, the prices that we pay for goods that we import, let's say, from Germany or from China or from Japan can be more expensive, and that could push up inflation. And so while it certainly would be the case if we had a sharp drop in the dollar overnight or over a very short period of time, we might find ourselves paying a lot more for that imported car that we have in our driveway or for the imported wine or for the imported oil, for example. And so that would be the case.

Now, on the other hand, a weaker dollar makes our import or our exports a lot cheaper for foreigners to purchase. So it kind of cuts both ways, but I think what we've seen even recently since QE has started and over the long 40-year history of the dollar being off the gold standard is that movements of the dollar generally are pretty gradual. And there's a good reason for that because the U.S. is still the world's largest economy, a lot of global trade, a good chunk of global trade, occurs in dollars. We're still the world's largest exporter of manufacturing goods. So there's a reason why foreigners as opposed to foreign governments and foreign businesses and foreign individuals want to hold dollars. There's still really good reason for that. So the likelihood of getting a big run on the dollar overnight or over a short period of time is pretty low.

Mark Hamrick: And John, for the people out there who might be either associating the strength of the dollar with U.S. standing abroad or, I guess, long-term -- you might say -- U.S. might, if you were saying that the U.S. dollar had been in a decline for, let's say, 40 years and stands to weaken further, would they be wrong to associate all those things together?

John Canally: No, I think at the margin they would be, and I think certainly if we somehow didn't make good on all of our promises to pay our bills on time, if we didn't make good on our promises to repay the Treasurys that foreign governments own, I think that would be a big concern. But yeah, I mean there have been cases in the past where various administrations have gone out and preached "a strong dollar is good for America." And I think that some respects it is, in terms of global standing. But from an economic perspective, having the dollar depreciate a little bit each year tends to benefit the overall economy, doesn't really hurt our standard of living in any large way. But what you have to watch out for is that big overnight drop that you get in the dollar. So you wake up and the morning after, if you will, and there's a big drop in the dollar because there's a loss of faith in the U.S. government, in the ability to pay our bills on time and the ability to kind of be the global leader that we are -- that's the real concern. I think that's a -- it's a persistent concern but it's a very low probability event, and I think a much higher probability event is that we return to our -- to the pace that we've been at before, which is the dollar just continues to depreciate again based on the fundamentals of interest rate differentials or large current account deficit or large trade deficit or budget deficit. Those kind of things are going to put much more persistent downward pressure on the dollar than sort of a loss of faith in the United States.

Mark Hamrick: Well, we spend them, we save them, we -- some people invest them. The dollar's very important. John, thanks so much for shedding some light on this.

John Canally: Thanks Mark.

Mark Hamrick: John Canally. He's chief economist for LPL Financial.

He spoke with us from his office in Boston.

(TRANSITION)

And on the subject of dollars: What if you have more dollars than most people, and hope to keep it that way?

Bankrate's Laura Dunn tells us about the financial habits of the wealthy.

Laura Dunn: To keep their earnings, the wealthy monitor how they spend, invest and save.

It isn't enough to earn a lot of money. If they're still working, the well-to-do live strictly off their wages, never touching their investment portfolios.

The wealthy also keep the end goal in mind. They generate more cash inflow while reducing cash outflow. They focus on buying things that hold or appreciate in value, instead of letting continuous expenses eat into their savings. They set automatic savings triggers, which puts a portion of their earnings into a separate savings account.

Wealth-builders know that when they don't make their money work for them, they lose it. The wealthy gain all the tax advantages they can by investing the max amount allowed into a company-sponsored 401(k), to get their employer's match.

Whether you're rollin' in dough or you have a plan in place to attain wealth, it's important to do your research. For more tips on wealth-building habits, check out Bankrate.com. I'm Laura Dunn.

Mark Hamrick: This week in business history might fall under the heading "Christmas in May."

It was on May 29, 1942, that Bing Crosby recorded Irving Berlin's "White Christmas." Released months later, it would become the best-selling Christmas single in history.

Of course, it was the film "Holiday Inn," starring Crosby and Fred Astaire, that introduced the tune.(CLOSING THEME)(CLOSE)

You've been listening to "Your Money This Week."

For more on this and other personal finance issues, visit Bankrate.com. Thanks to producer Lucas Wysocki.

I'm Mark Hamrick. From all of us here at Bankrate, here's hoping you have a great week.

Embed Audio

Winter slowdown: RIP

In terms of economic storylines, winter has become the whipping boy taking the blame for much of the ills of the first quarter. As with many things, the story is more complex than that, but winter remains the chief culprit.

The initial reading on first-quarter gross domestic product was the smallest gain possible, just 0.1 percent. Now, a month after that estimate, economists believe this week's revision will show the economy actually contracted during the period, but just barely.

A 'meh' year?

What winter took, spring has likely given back. What remains to be seen is whether the rebound can be sustained in the second half of the year.

We won't know how second-quarter growth looked for a few months. But some economists think growth could come in (fasten your seat belt!) between 4 percent and 5 percent.

So, what will the story be for all of 2014? Despite the bumpy ride in the first half, the year might ultimately be pretty average.

"The poor first-quarter performance will likely result in total growth for 2014 falling well short of earlier consensus forecasts of 3 percent for the year," says Alan MacEachin, corporate economist for Navy Federal Credit Union. He says he expects total growth for 2014 to come in around 2.5 percent.

Peter Morici, a professor at the University of Maryland's Smith School of Business, looks for growth in the second half of the year to top 3 percent, though he says, "That is not spectacular given what we have been through."

Housing remains a problem child

Having served as a tripwire for the financial crisis, the housing sector continues to threaten overall economic strength. It is as if the minefield hasn't yet been cleared.

Last week's snapshot of existing home sales for April demonstrated that stress point. The National Association of Realtors reported that sales of single-family homes rose 0.5 percent, compared with a more than 7 percent gain for condos and co-ops. That's consistent with an earlier reading on housing starts that showed strength in the so-called multifamily segment. Demand is better for new apartment buildings.

This week, the S&P/Case-Shiller report will tell us how home prices are faring in the major metro areas. As a prelude, the Realtors' report said home prices were up 8.6 percent in the first quarter, compared with a year earlier. The trade group expects slower going ahead for home-price appreciation.

In business history: Christmas in May

On May 29, 1942, Bing Crosby recorded Irving Berlin's "White Christmas." Released months later, it would become one of the best-selling records in history.

The film "Holiday Inn," starring Crosby and Fred Astaire, introduced the iconic tune.

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